What does "fly by the seat of one's pants" mean?

The meaning and origin is covered in this article on The Phrase Finder. An extract:

Meaning

Decide a course of action as you go along, using your own initiative and perceptions rather than a pre-determined plan or mechanical aids.

Origin

This is early aviation parlance. Aircraft initially had few navigation aids and flying was accomplished by means of the pilot's judgment.

This Sydney Morning Herald article also says that before advanced instruments, pilots would have use the feel and slide of the seat to tell how the plane was moving.

Flying by the seat of one's pants was originally a literal (or nearly-literal) phrase, meaning to use all of one's senses -- including lateral and vertical "G forces" transmitted to your derriere through the seat -- to control an aircraft in flight. Early flight "instrumentation" consisted largely of a magnetic compass (which is only useful when flying straight and level) and a length of string (really!) to tell you the direction of airflow relative to the plane.

While the phrase may have been used in a pejorative sense in your example, it isn't always the case. Improvising everything in life probably isn't a good idea, but instruments (metrics) lie, and blindly following procedures can exacerbate a problem that situational awareness and instincts developed through experience could have nipped in the bud.

It means the same as "play it by ear" or "wing it" - to improvise plans and procedures as necessary.

The other answers perfectly explain the meaning and where the phrase stems from.

In addition, one thing that personally helped me understand the logic—or how the phrase can make any sense—was this definition of "seat" in the NOAD (emphasis mine):

2 a person's buttocks.
• the part of a garment that covers the buttocks.

You see, I had thought "seat" can only mean a chair or such! (Probably related to the fact I'm a 2nd language speaker.)

Incidentally, NOAD's "seat" entry also gives this definition for "by the seat of one's pants":

(informal) by instinct rather than logic or knowledge.