with default mame analog settings it seemed to work fine here (although i havnt played the original arcade cab/used a 49-way joystick)
with my ps2 dualshock2 controller (and a ps2 controller to pc usb adapter) i was able to:
1. fly in much more than 8 directions 2. if i hold the analog thumbstick on my ps2 dualshock2 controller very slightly in any direction, the ship moves forward very slowly. the further i push the stick, the faster the ship goes, and it goes super fast if i push the thumbstick all the way in any direction.
so to conclude, it seems to be fine here, but as i say i havnt played the original arcade version so cant say how close to the arcade controls it performs
very strange if you can only get the ship to fly at one speed. for starters try deleting your sinistar cfg/ini/nvram files and starting from scratch