Learn Arabic (Modern Standard): احتفلوا بالعيد.

The ending ـوا attached to the verb makes it 'they' (masculine or mixed group). Without it, the base past tense verb احتفل just means 'he celebrated'. Notice the silent letter ا (alif) at the very end. It is always written after the و (waw) in this plural ending, but we do not pronounce it.

Why is there a بـ (bi-) attached to the word for 'the holiday'?

In Arabic, certain verbs require a specific preposition to connect to their object. The verb to celebrate, احتفل, pairs with the preposition بـ (which normally means 'with' or 'in'). So literally, this sentence says 'They celebrated with the holiday.'

What happens to the 'al' (the) in العيد when the بـ is attached to it?

When the preposition بـ attaches to a word starting with الـ (al-), the first letter (alif) becomes silent in pronunciation. So بالعيد is written together as one word but pronounced 'bil-iid', skipping the 'a' sound of 'al'.

Why isn't there a separate word for 'they' like هم (hum) in this sentence?

In Arabic, the past tense verb ending ـوا already contains the subject 'they'. You usually do not need to add the separate pronoun هم unless you want to strongly emphasize who did the celebrating.