I saw this one a couple of nights ago on Nicktoons after not having seen it in a while...
This really isn't a bad episode. Honesty, even the songs aren't that bad. There are some funny gags, the animation is really good with some great poses and layouts and I love all the bits with the Old Man Jenkins character.
But it isn't a fantastic episode, and not something that was worthy of such a big "Lost Episode" sort of hype. Additionally I've never liked Patchy the Pirate. At all. Tom Kenny needs to just stick to voice acting, because his on-screen presence is grating and the intentionally bad live-action sequences he stars in don't help. And I didn't need to see his sweater vest of body hair during Patchy's shower scene.
I think if "The Sponge Who Could Fly" was aired as simply a regular episode without the build-up and Patchy sequences people wouldn't have a problem with it. But all that other stuff drags it down. It's not the cartoon's fault though.
And to be honest, I wouldn't really want to lose the Patchy bits in this episode, because the "walk cycle" fake-out is too darn funny to give up. And the narrator telling the audience to get lost at the end of the episode is a hoot too. Again, none of this is as bad as "Ugh".