Heh heh- it wouldnt be much of a game if Squall got incinerated in the first three minutes would it? The other 3 discs would be really quite awful!
I think the fire is just used to add tension to the fight, plus it shows what a cheat Seifer is (who blinds a man and then tries to take his face off!? Where's the dignity in that?) It also shows the rivalry between Squall and Seifer in a cool way- its better than watching them grumble and stare at each other from across the classroom.
The real question is did Seifer take Squall's lunch-money after the fight?