Question

1. We are flying above the clouds.
2. We are flying over the clouds.
(Are both O? Which one is better?)

3. It seems that they know what they are doing.
(What does 'it' refer to in this sentence?)_

Answer 1

#1 means that you are in sustained flight higher than the clouds

#2 implies that in a while you will come back down, as in "The cow jumped over the moon."

#3 Lots of explanations online. You might start here:

http://www.grammarbank.com/impersonal-pronouns.html