Many animals rely on an internal heading representation when navigating in varied environments1-10. How this representation is linked to the sensory cues that define different surroundings is unclear. In the fly brain, heading is represented by 'compass' neurons that innervate a ring-shaped structure known as the ellipsoid body3,11,12. Each compass neuron receives inputs from 'ring' neurons that are selective for particular visual features13-16; this combination provides an ideal substrate for the extraction of directional information from a visual scene. Here we combine two-photon calcium imaging and optogenetics in tethered flying flies with circuit modelling, and show how the correlated activity of compass and visual neurons drives plasticity17-22, which flexibly transforms two-dimensional visual cues into a stable heading representation. We also describe how this plasticity enables the fly to convert a partial heading representation, established from orienting within part of a novel setting, into a complete heading representation. Our results provide mechanistic insight into the memory-related computations that are essential for flexible navigation in varied surroundings.