Alveolar epithelial type II (AT2) cell dysfunction is implicated in the pathogenesis of familial and sporadic idiopathic pulmonary fibrosis (IPF). We previously described that expression of an AT2 cell exclusive disease-associated protein isoform (SP-CI73T) in murine and patient-specific induced pluripotent stem cell (iPSC)-derived AT2 cells leads to a block in late macroautophagy and promotes time-dependent mitochondrial impairments; however, how a metabolically dysfunctional AT2 cell results in fibrosis remains elusive. Here using murine and human iPSC-derived AT2 cell models expressing SP-CI73T, we characterize the molecular mechanisms governing alterations in AT2 cell metabolism that lead to increased glycolysis, decreased mitochondrial biogenesis, disrupted fatty acid oxidation, accumulation of impaired mitochondria, and diminished AT2 cell progenitor capacity manifesting as reduced AT2 self-renewal and accumulation of transitional epithelial cells. We identify deficient AMP-kinase signaling as a key upstream signaling hub driving disease in these dysfunctional AT2 cells and augment this pathway to restore alveolar epithelial metabolic function, thus successfully alleviating lung fibrosis in vivo.