Well, I was expecting them to go back to save Makarov, but I wasn't expecting it to end like that. I'd have expected them to either escape all together or beat the dragon somehow using nakama power. I'm sure they're alive. Main characters don't die in FT. They just faint and stay off-screen for a while.
Post-time skip Fairytail has been doing really badly. I didn't realize the people on the island counted for like 50% of Fairytail's mages. I figured there were perhaps a decent number you never see because they're just mostly there to fill in the background when Fairytail is having a huge party. My assumptions were wrong. And now no one wants to hire a guild with no S-class mages.