The bottom line is that the iPad doesn't do subtitles so it will need some effort to get them working.
I noted the following which involves using Handbrake (free for Mac and Win).
"HandBrake can only burn dvd subtitles into the video when using the mp4 format. mp4 only supports text subtitle tracks and dvd subtitles are bitmaps. If there is a closed caption track on the dvd, those are text and can be included as a text subtitle track in mp4. Your only options are:
1. Use something like SubRip to extract the subtitles and convert to SRT. Then import the SRT into handbrake.
2. Download an SRT with the subtitles you want from someplace like opensubtitles.org and import the SRT into handbrake."
This was something I copied for reference but sadly forgot the attribution.
Tbh I didn't have much luck when I tried it.....
Suggest you try reencoding the video with fixed subtitles using a program like subtitle workshop before converting and or using Air Video.
Try Oplayer, they have subtitle support now. plus they'll also do avi and other formats. It's about $4.99 on the App store and my most used video player now.
Jailbreak your iPad, then go to the cydia store and download an app called XMBC. It can truly play just about any video file, and it will either automatically detect the .srt file if it's in the same folder, or you can browse and select it.