Edit: I’m debating deleting this post. It doesn’t have any references to back it up, and I just realized that if the tracking network encrypts the location with the public key such that the private key is required to decrypt the location, it is indeed possible for Apple to not know where devices are because the decryption of the location might be done on your device rather than on Apple’s servers, if they wanted to.
Original post follows: I haven’t read any white papers on how this works, but I’m going to call “slight BS” anyway. Technically, Apple knows the location of the AirTag, that’s how their network works. The payload of airtag data might be encrypted, but Apple also keeps the keys for your AirTags so that you don’t have to associate new AirTags with each Apple device you want to use Find My on. While I don’t doubt that Apple strictly reduces what information they log or identify about AirTags to literally the bare minimum that keeps the service running, it’s a bit ingenuous to suggest Apple doesn’t know. What I mean by this is Apple isn’t lying when they say they don’t know the location of your AirTag (until you use their app to look for it) but it is true they know the location of all AirTags synced to their network, they just don’t know which one is yours until you go looking for it. Encryption probably plays a role in that asymmetric encryption would allow Apple to not know any AirTag details until your devices provide the decryption key. A handshake could be involved too so that your device can’t decrypt the location of the tag without proving they own the associated encryption key. But presumably Apple has a way of issuing or remotely authorizing against such keys. It is likely the case that your password for your phone protects Apple from gaining access to the keys thus justifying the position that Apple doesn’t have access because they don’t have your keys. Apple would have to act maliciously with their software into order to break this system, and it’s not worth it for them to do so. I’m not saying they’re lying but they are simplifying things a bit.