It extracts the already quantized DCT coefficients and related data from the JPEG bitstream and re-encodes them with JPEG XL’s more efficient entropy coding and container,

Think of it as zip compression that is specially designed for JPEG and putting the JPEG data in a different/better container.

JPEG is a lossy format. JPEG -> AVIF adds a second loss operation. JPEG to JPEG-XL is lossless but with a smaller file size. So one does not further degrade the jpegs beyond what they were already degraded in creating them in the first place.