While this is a good method for leveling up super quick, your Dratini won't learn new moves as a result or gain EV boosts with each level up. But yes, this is the best way of catching a Dratini early (hehe!).
And yes, Dratini is a good HM Slave, since it can learn Whirlpool, Surf, and Waterfall. I have a Dragonair that has those 3 moves (plus one Dragon-type move for good measure) that I reserve for water-based puzzles. Not much good in battle because of STAB, but meh.