The past model for AppEngine involved some pretty heavy development work modifying the JVM and Python VM to implement multi-tenant sandboxing. This obviously doesn't scale very well from a development perspective, and shows why new platform versions have always lagged far behind release.
If I were to infer what they are doing internally now, it would be replacing "legacy AppEngine" with "container AppEngine". In a few years you'll see them migrate everyone to containers that will scale in unsurprising ways to users of AppEngine today.
The reason they haven't moved everyone over to containers is that the dev experience for containers on AppEngine sucks horribly right now and they want it to be at least as seamless as it is for Python and Java right now. They also need to migrate 100% of the legacy AppEngine console functionality over to the new cloud dashboard before they could consider this complete.
So my guess is that AppEngine as we know it is "dead", but being replaced by a product that is a pure superset of what we have today.