Frank Murphy is a Los Angeles Police Department (LAPD) air support division pilot and troubled Vietnam War Veteran with post-traumatic stress disorder. His newly-assigned observer is rookie officer Richard Lymangood. The two patrol the city by helicopter and give assistance to police forces on the ground when needed.
Finishing their evening patrol, the pair are placed under a two-week suspension for allegations of voyeurism during a nearby mugging that resulted in the death of city councilwoman Diana McNeely. Murphy is provisionally reinstated for duty by Captain Jack Braddock and instructed to attend a private sunrise demonstration in the Mojave Desert at a US Government weapons testing facility, named "Pinkville", and selected to pilot an advanced urban warfare helicopter, informally called "The Special" but given the nickname "Blue Thunder", during an evaluation exercise. It is a militaresque combat-capable helicopter intended for police use in surveillance and against possible large-scale civic disobedience or terrorism during the upcoming 1984 Summer Olympics in Los Angeles.
With robust bulletproof armor, powerful armament, and other accoutrements, such as thermal infrared scanners, unidirectional microphones and cameras, built-in mobile telephone, computer and modem, a six-barreled 20 millimeter electric cannon, a "whisper mode" that lets the vehicle fly silently and a U-matic video cassette recorder; Blue Thunder appears to be a formidable tool in the war on crime. Murphy notes wryly that with enough of these helicopters "you could run the whole damn country."
When McNeely's death is seemingly turning out to be more than just a random murder, Murphy begins his own covert investigation. He discovers that a subversive action group is intending to use Blue Thunder in a paramilitary role to quell urban disorder under the project codename T.H.O.R. ("Tactical Helicopter Offensive Response"), and are secretly eliminating political opponents to advance their agenda, a tidbit McNeely was looking into at the time.
Murphy suspects the involvement of his old Vietnam nemesis, former United States Army Colonel F.E. Cochrane, the primary test pilot for Blue Thunder and someone who felt Murphy was "unsuitable" for the program. During a test flight operation over the city, Murphy and Lymangood use Blue Thunder to follow and record a meeting between Cochrane and the other government officials which would implicate them in the conspiracy, but Cochrane unexpectedly looks outside, sees Blue Thunder hovering in front of their window and realizes what has happened.
After landing, Lymangood secures the videotape and conceals it, but is ambushed upon returning to his home, interrogated, and then killed while trying to escape. Murphy hijacks Blue Thunder and arranges to have his girlfriend Kate retrieve the tape and deliver it to a local TV station, using the helicopter to thwart her pursuers. After a chase through the city which wrecks many police and civilian vehicles, Kate arrives at the TV station, but is intercepted by one of the conspirators, Fletcher, claiming to be a news producer. The reporter Kate was instructed to give the tape to arrives in turn and takes possession of the tape. Fletcher pulls a gun but is knocked unconscious by a security guard before he can electronically erase the recording.
Fearing exposure by Murphy, Cochrane and the other conspirators employ every asset they can muster to bring Blue Thunder down, including the initial support of the municipal government; beginning with two LAPD Bell 206s manned with SWAT teams. After Murphy incapacitates the first one, forcing it to land via autorotation, he engages in a cat-and-mouse chase with the second by slaloming down the Los Angeles River viaduct until his pursuer crashes. Following this, two Air National Guard F-16 fighters are deployed to shoot Murphy down, but he manages to shoot one of them down and evade the other. In the process, one of the fighters' heat-seeking missiles obliterates a barbecue stand in Little Tokyo and a second missile hits the sun-heated windows of an ARCO Plaza high-rise building, in both cases having been fooled into missing the helicopter by the heat generated by the false targets. Appalled at the heavy destruction in the city so far, and determined to avoid further collateral damage, the mayor withdraws the hunt-and-destroy operation.
Cochrane, frustrated and bent on finally putting down his former subordinate, neglects his orders to stand down and ambushes Blue Thunder in a heavily-armed Hughes 500 helicopter. After a tense battle, Murphy, for the safety of the general public, goads Cochrane into moving from the city to the less-inhabited industrial sector and shoots him down, executing a 360° loop through use of Blue Thunder's turbine boost function. With the aircraft having sustained heavy damage and running low on fuel, Murphy then destroys Blue Thunder by landing it on tracks in front of an approaching freight train; the helicopter erupts in a huge fireball as Murphy quietly walks away unharmed.
In the meantime, the tape is made public, and the conspirators are exposed and arrested.
Murphy uses Blue Thunder to expose the conspiracy, securing evidence with the help of his girlfriend and confronting his adversaries, ultimately preventing the misuse of the helicopter.
The ending underscores the dangers of unchecked surveillance and militarization within civilian policing, as Murphy's actions bring the covert operation to light. By choosing conscience over compliance, Murphy ensures the truth surfaces, delivering both personal and public vindication. The resolution cautions against the seductive power of technology in the wrong hands and affirms the necessity of vigilance in a democracy.