I've blogged my love of this particular James Blunt song a number of times (here, here and here). The song is about that passing encounter you might have with a stranger on a subway, where you pass them, and think "Mmm, he or she is hot" and you know you'll never see them again.
The lines "she smiled at me on the subway, she was with another man" do actually refer to the Tube. James Blunt was on BBC on Saturday night and according to Geoff ""Goodbye my Lover" is about a girl, THE girl for him that dumped him that he believed was 'the one' and he couldn't believe it when she ended it. It turned his world upside down.
"You're beautiful" is then about when he saw her for the first time a few months later after she'd dumped him. It was on an underground train in london, they met eyes for a second - a lifetime flashed by - he said - and then she turned away, got back with her new bloke and they got off the train, and he's never seen her since."
UPDATE - Just to dispell the rumours that I fancy James Blunt or think all of his songs are brilliant - I don't. In my opinion You're Beautiful is an excellently written love song and deserves all the plaudits. However, I was sent a link to a truly funny and wonderful spoof of the video to You're Beautiful, entitled You're Gullible. You can even throw rotten tomatoes at James while he sings. James Blunt (like Jamie Oliver) is certainly one of those people that you love or hate! Well done to the eclectech guys for actually doing something funny and entertaining though, rather than just bleating on about how much they hate something.