It sounds like a crazy and dangerous thing to do and in some ways it is. It means to depend on your nerve and instinct in a situation and to improvise rather than have a detailed plan.
"When we set up the company, for the first year, we were flying by the seat of our pants."
As this is an aviation idiom, it seems a good idea to watch a dramatic plane video of some real life seat of the pants flying. That's not to say that the pilots featured aren't prepared - quite the opposite, they sure need to know what they're doing.
I've landed and taken off from Madeira, one of the airports featured, and I can tell you, it's pretty weird. You feel that your going to land in the sea. Taking off isn't much better as you head straight towards the mountain and veer off sharply left at the last minute!
