Small World: Strategies for using dwarves in a 2-player game
Dwarves just aren't a great race, you're never going to want to pick them highly.  However, once there is a little stack of Victory coins on top of them, who knows?  If you reckon you are in a position to conquer a couple of Mine regions (perhaps, as you say, by Flying) and then hold them over a fair number of turns, defended by your Active race, then they may be cost effective.

In general though, it's not advisable to look at Small World and say "all races and powers must be balanced - if this one seems excessively weak, I must be missing something".  The races and powers are not created equal: players must use their skill and judgment to decide how much they're willing to pay to grab a good combo, or willing to be paid to take a less-than-attractive one.  That's one of the major factors in being a great Small World player!