"Where are they walking?"
Translation:Wo laufen sie?
You are right, but notice that in English, since the question is too ambiguous and it could have the two interpretations, in order to distinguish the two, a final "to" would be added: It's not the same "Where are they walking?", and " Where are they walking to?" I think this is why "Wo" is used.
For "Wo laufen sie" I could answer "They are walking on their respective treadmills". It is the location where they are as they perform the action of walking. For "Wohin laufen sie" I could answer "They are walking to the supermarket" because the request is for their destination.