In the Metropolitan Police Astro Division of Los Angeles, which controls all police helicopters, the night shift is about to begin. After checking off the list, Captain Braddock (Warren Oates) is looking for the senior pilot Frank Murphy (Roy Schneider). He orders the rookie observer Lymangood (Daniel Stern) to find Murphy. Lymangood finds Murphy in the ready room, playing with his digital wristwatch. In a few seconds, Murphy goes to talk to Braddock, only to find that his regular observer, Montoya, has been transferred to day shift. Instead, he gets the rookie Lymangood.
The pair takes off in one of the helicopters, and Murphy is able to spot things on the ground, pointing out things even before the rookie can even get his binoculars on it. They respond to a store robbery call, shine the "midnight sun" searchlight onto one of the perps, and get shot at for their effort. However, a squad car arrives and officers quickly bring the suspect down. As the helicopter circles overhead, Murphy and Lymangood spot someone creeping up on the officers. They try to give directions, but it's too dark, and Murphy takes the helicopter down, only 10 feet off the ground, and "dust" the suspect, drowning him in dust, which gives the officers enough time to subdue the other suspect.
Later that night, they spot an apparently abandoned vehicle, no plates, in the Brentwood neighborhood, pretty upscale. They call it in, and Murphy decides to show Lymangood something interesting. They fly over to nearby Encino, which is outside their patrol area. At 9:30PM, Lymangood is able to observe a very flexible young woman doing some amazing yoga moves in the nude. Unfortunately, they are interrupted. That "abandoned car" they spotted earlier was not abandoned. The character inside watches as a black woman drives her Lincoln by, opens her gate, and enters. He quickly follows and places a brick to block the gate so it can't close, and another car roars into the courtyard, smashing into the back of the black woman's car. Then two men emerge from the car and rush forward, one yelling "get the briefcase!" as the other tries to subdue the black woman.
The patrol cars arrive on the scene just as the suspects try to escape, and run back into the yard, and Murphy's air unit arrives overhead, as they observe the ensuing gun battle. The two suspects only have light revolvers, while police are armed with revolvers and shotguns. One suspect is hit and falls face down into the swimming pool. The other tries to climb the fence with the briefcase, but he is spotlighted by the helicopter and police hit him twice. The briefcase falls and splits open, papers fly everywhere in the helicopter's downwash. The black woman is pleading, "Just let them go! Please!" as she staggers toward the gunfight. The suspect on the fence returns fire at the police, hitting the black woman instead in the neck. Then three policemen fire, hitting the suspect multiple times, who falls from the fence.
Murphy, watching from above, suddenly has a Vietnam flashback, about being a pilot in a U.S. Army helicopter and about a man in North Vietnamese Army uniform falling after being pushed out of the helicopter by an unseen U.S. serviceman... and the helicopter loses several hundred feet in altitude before he regains control.
A little later, Murphy's unit lands back at the base, and is summoned for a session with an angry Captain Braddock, who grounds both Murphy and Lymangood for that "stunt" over Encino, practically hovering right off someone's balcony, instead of patrolling over their assigned area, and may have prevented the assault on City Councilwoman McNealy (the black woman previously shot). McNealy is now in critical condition in hospital. McNealy had always criticized police tactics and this does not make the police look good.
Murphy goes home, checks his phone messages on his anwsering machine, and is about to relax when he hears someone at the door fumbling with the lock. He pulls out his .38 pistol, only to find his girlfriend Kate (Candy Clark) and her son. They have a bit of discussion about their future, and she eventually leaves.
The following evening, Murphy decides to check out Councilwoman McNealy's residence, now a crime scene, having heard that McNealy has died in the hospital, and the Watts district is in an uproar as racial tentions are starting to escalate. Detectives have already gone through it, retrieving most evidence they can find. However, Murphy is able to find a piece of paper lodged in a tree. Just when he gets back to his car, his pager goes off. He finds a public phone and call back to base... Captain Braddock wants him back at the base ASAP.
Murphy returns to base, only to find Captain Braddock with two strangers dressed in black business suits, who introduce themselves as Mr. Fletcher (David Sheiner) and Mr. Icelan (Paul Roebling). The two 'men in black' announce that Metro is going be the testing ground for a new $5 million goverment built helicopter, and Murphy has been selected as the senior test pilot, and will be observing the demonstration. They get into a van and drive off outside the city. Murphy asks what is this about, Icelan replies that soon, it'll be 1984 Summer Olympics, which will attract all sorts of rabblerousers... terrorists, and what-not. Thus, some contingencies must be planned, such as this thing they're about to see.
The van drives out into the desert, and approximately at sunrise, they arrive at the test range, along with various other observers: officers from various other law enforcement and military agencies, and many civilian contractors. The demonstration is for this new helicopter nicknamed "Blue Thunder", fully armored, and has a chain-gun in the nose capable to dealing out precise firepower. The chopper is also a full surveillance platform, with video, infra-red, and audio capabilities, as well as a "whisper mode" which cancels a lot of the noise from the rotor blades, and turbine boost for the two turbines for extra amount of power. It also has access to almost any computer database in the world.
The chopper makes a impressive demonstration, eradicating red targets (for terrorists) quickly and efficiently, but it does take out a few white targets (civilians) as well. Murphy remarks to Braddock, who replies that one civilian dead for every 10 terrorists is an acceptable ration. Murphy replies sarcastically. When "Blue Thunder" lands, Murphy is surprised to recongize the pilot whom is old nemesis: Colonel Cochrane (Malcolm McDowell), the commander of his unit in Vietnam. Cochrane is surprised as well to run into Murphy. It is clear that both men do not like each other very much as Cochrane makes some sarcastic quirks to Murphy who quietly bushes it off. In private, Fletcher and Icelan talk with Cochrane about that they didn't know that he knew Murphy. Cochrane quickly dismisses Murphy as "no threat" to the program to Fletcher and Icelan. To make sure of this, Cochrane orders Fletcher and Icelan to have Murphy on a "check flight" the next day.
Back at Metro Headquarters, Murphy finds Montoya (Joe Santos) and asks him about that "note" he found in McNealy's place which is in Spanish and to translate it for him.
Next day, Cochrane is out first... and sabotages Murphy's helicopter for some reason by tampering with a wire in the engine. During the day, Cochrane pilots Blue Thunder, with Murphy and Lymangood piloting the faulty chopper. Before the flight, Lymangood tells Murphy that he heard that Murphy had actually did a 360 vertical loop in a helicopter. Cochrane walks by and remarks that the move is physically impossible.
After a series of maneuvers, Murphy's chopper loses control of the engine and has to auto-rotate to a landing. After failing to land on top of a passing yellow school bus, Murphy crash lands his helicopter on a construction shack instead in the Watts neighhood. The construction workers help Murphy and Lymangood out while keeping a crowd of angry and racist black and Latino citizens at bay.
Later that day, Montoya meets with Murphy for he has translateted the note which tells something about some weird people in the barrio making trouble, and something about "THOR". Both Murphy and Montoya have no idea what it stands for.
The next morning, Murphy confronts Cochrane in a parking garage about his suspicions that he may have sabatoged his helicopter in trying to kill him for some irrational grudge against him steming from their service in Vietnam. Cochrane (clearly revealed as a charming sociopath at this point to the viewers) calmly denies any wrongdoing and tells Murphy that HE is the one who has a problem with him over being too soft-hearted.
A little later, Braddock approaches Murphy claiming that Cochrane had just told him that Murphy threatened him with physical harm in the parking garage (with Cochrane naturally playing-acting as the "poor, innocent victim"). Murphy tells Braddock that Cochrane is lying and he has an agenda. Braddock wants to belive Murphy, but tells him to stay away from Cochrane to avoid any further hassles.
That evening, Cochrane's attempt to kill Murphy apparently didn't prevent both Murphy and Lymangood from flying the Blue Thunder for a test flight at night. Lymangood has previously learns that everything recorded onboard the Blue Thunder goes into a special tape deck below. Murphy and Lymangood take off to test the Blue Thunder.
They find plenty of harmless targets to test the various capabilities. Just as they are returning, they spot Cochrane and Fletcher leaving the Metro building. Instead of returning to base and landing, they decide to follow Cochrane to see what he is up to, and they end up in the Federal Building downtown. Lymangood starts playing with the computer, looking up his own information, and it's amazingly complete. Murphy tries to look up his own info, but gets: "FILE UNDER REPAIR". He tries to search Cochrane, and gets a long military service history, as well as "currently assigned to Project THOR". An inquiry about Project THOR shows that T.H.O.R. stands for Tactical Helicopter Offensive Response. Murphy orders the whisper mode activated, thermal vision activated, and audio surveillance activated, as they search the Federal Building for Cochrane, and they find him, along with other people in the project, discussing the killing of McNealy, about how McNealy realized that they're stirring up trouble so she HAD to go, and how Murphy is becoming a problem and will be taken care of soon. Cochrane eagerly offers to kill Murphy himself and claims that he wished he had done it in Vietnam. The group agrees and permits Cochrane to kill Murphy whenever he feels the time will be right. It is right then when Cochrane looks out the window... only to see Blue Thunder looking back at him! Blue Thunder quickly returns to base.
At the base, Lymangood quickly "borrows" the code cards to remove the videotape, before any one else can get to it, while Murphy goes to find Braddock to tell him what he heard, only to find Icelan standing beside Braddock in Braddock's office, thus leaving Murphy with no choice but to keep silent. Murphy sees Lymangood removing the videotape from the helicopter, but plenty of people also see him do it.
Later that night, Lymangood returns home, only to find his place burglarized, and a stranger sitting in his chair. Before he can utter a sound, he gets hit from behind and tied up, and his mouth taped up. The same perp who was at the NcNealy attack and a part of the Cochrane conspiracy meeting at the Federal building is outside in his car waiting for them. The two thugs tell Lymangood that they want the videotape, and they are willing to torture Lymangood to get it. They start by breaking one of Lymangood's fingers. Lymangood fakes compliance, and is able to disable the two attackers in his house. After subduing both of them, he runs outside, and the third perp chases him in the car. Lymangood almost gets away except when he runs into a bicyclist and falls, and gets run over by the perp and dies at the scene.
Murphy, who was on the way to Lymangood's house, happens upon the scene as a paramedic team is putting Lymangood into a body bag. Murphy angrily curses at himself, but he knows that he has to get away, for whoever killed Lymangood will pin the killing on him. Murphy gets away before a squad car arrives on the scene.
The next morning at Astro Division HQ., Murphy sneaks into the main hangar and into Blue Thunder. He reinserts the fuse into the cockpit recorder and finds Lymangood's last audio message: he hid the videotape in a dumpster out by a drive-in theater's projection shack. Murphy is deciding what to do when a mechanic knocks on the window and shouts: "Hey! You're not supposed to be in there!" Murphy thinks for a second, then pulls his pistol and points it at the mechanic, who quickly flees. Murphy quickly dons the helmet and starts the engines, and takes off. While Cochrane and others are deciding what to do next, they see Murphy take off in Blue Thunder.
Murphy quickly uses the mobile operator on board the helicopter to place two phone calls, one to Alf Hewitt (James Murtaugh), a Channel 8 investigative reporter, and one to Kate asking her to go find the tape at the dumpster and deliver it to the Channel 8 studio. Cochrane and the members of the conspracy overhear Murphy's two phone calls and decide to kill him before he goes public with what he knows.
Kate arrives at the drive-in theater. Seeing no one, she crashes through the front gate. The cleaner sees this and quickly calls the police. After some frantic searching, Kate finds the videotape, but only by jumping into the dumpster herself. She pulls it out just as a police car arrives. Murphy returns to escort Kate to the Channel 8 news building. Kate, being a pretty crazy driver, is able to evade pursuit by several police cars.
Meanwhile, a SWAT team armed with heavy machine guns have boarded two helicopters, and have appeared on either side of Murphy. However, Murphy does not react at first. When one helicopter opens fire, Murphy responds by knocking the front searchlight off the shooter, then puts just a few bullets into the engine to force the helicopter down. The other chopper opens fire, but with little effect since most of the bullets bounce off harmlessly at Blue Thunder's thick armor. Murphy flies down into the L.A. reservoir channels, and in a series of tight turns, the police chopper, heavily laden, is unable to make a turn and crashes into a pillar, fortunately suffering no casualties.
Back on the ground at police headquarters, Cochrane and his team are portraying Murphy to reporters and everyone else as a madman who killed his partner and is now in the sky doing terrorist acts (having fabricated Murphy's personnel file to include a vast list of false crimes). They convince Braddock and the local mayor (Jason Bernard) to ask the Air Force for help. Two F-16 fighter jets are scrambled.
Elsewhere, Kate is driving calmly when another police car recognizes her after being contacted by Cochrane to detain her. She tries to evade, but her small car cannot outrun a police car. She is stopped on a bridge when cornered by two police cars. The officers, with pistols drawn, order her out of her car when Murphy shows up in Blue Thunder. When the officers are distracted, she drives away. Murphy activates the cannon and fires a quick burst, cutting a police car in half and forcing the rest of the police cars to flee, but again causing no police casualties.
Kate makes it to Channel 8 news station. She has the tape still in the "eraser" container, which can be remotely activated to erase the contents of the tape. She enters and finds the lobby in chaos from the people asking about what is going on. She looks for Alf Hewitt, but she is told by the lobby receptionist that he's busy on a story. Just then, Fletcher arrives and pretends to be Hewitt's producer, and tries to charm the supicious Kate to give him the tape. Hewitt appears and is ready to take Kate away, and claims that has never saw Fletcher in his life. Fletcher tries to fight them for the tape, and pulls out a gun. The lobby security guard strikes Fletcher behind the ear with his gun knocking him out. Fletcher still has the grip on the cover, and as he falls, he pulls the cover off the tape. Just then, Cochrane and his boss (unable to find the code to the video cover to erase the tape) orders the "eraser" activated for all the videotapes, but it's too late for the tape is no longer in the cover.
Meanwhile, the two Air Force fighters are approaching downtown L.A. Murphy sees them, then slows to a hover... right above the smokestack of a barbeque shack in nearby Chinatown. When one of the F-16 fighters opens fire with a Sidewinder missile, it goes astray and blows up the BBQ restaurant to bits, raining chicken all over the area. The two jet fighters fly off to regroup. The other fighter decides to take a shot. This time, Murphy hovers between the Arco towers over downtown, just as a SWAT team arrives to order everyone out of the area. The Sidewinder missile, delfected by the reflection of the sun onto the building, hits the Arco Tower instead, raining debris down below.
The two fighters circle, but Murphy's not done. He activates the cannon, and with a long-range burst, catches one of the F-16's in the wing. The pilot ejects while the second F-16 retreats.
At Astro Division HQ, a Hughes MD5 Defender chopper has arrived, armed with two powerful 20mm guns with armor-piercing bullets. Cochrane suddenly orders the existing pilot out as he'll fly the thing... wanting to kill Murphy himself. Cochrane requests permission to take off. The mayor, having lost two police helicopters, a BBQ shack, one F-16, AND a part of a skyscraper, has had enough, and denies permission to take off. Cochrane takes off anyway, with steel-like determination to kill Murphy.
Meanwhile, Alf Hewitt and Kate are watching the tape in his office, and Hewitt was amazed at the content: it's a Federal government conspiracy to stir up trouble in the barrio, so that they can get funding for this armed helicopter program! Thus, Murphy is not only NOT insane, he could be "the hottest thing since Horatio dropped the bridge", according to Hewitt. He makes a call to someone.
Back up in the air, Murphy is watching the F-16 pilot drifting back down to earth under his parachute when the evil Cochrane attacks from his blind-side. The heavy cannons punch through the cockpit and wound Murphy, causing damage to the Blue Thunder chopper, as well as jam the nose turret into a "straight-ahead" position. Murphy quickly goes into evasive maneuvers, as the two adversaries dogfight among the skyscrapers and landmarks of the city in a climatic aerial battle. Murphy tries to set an ambush by turning around and hovering behind a building and opens fire, but Cochrane gets away, as his lighter armored chopper is faster and more maneuverable. And with a bit more maneuvering, he's right back behind Blue Thunder and Murphy, who's busy dodging bullets among abandoned factories.
In another flashback to Vietnam, it is revealed that Cochrane was the soldier who pushed the North Vietnamese soldier out of the hovering helicopter that Murphy was flying, and thus tried to court-marial Murphy for insubordination to cover up the killing.
Back in the present, with Blue Thunder now the hunted, a desperate Murphy decides on a gamble to end it all. He enables the helicopter's turbine boost on both engines, and goes for the 360 vertical loop. Cochrane tries to follow. The Blue Thunder completes the loop, and the cannon is heading up, as Cochrane's chopper is stuck in the sky, trying to loop but can't. Murphy opens fire with the cannon... and Cochrane's chopper explodes, killing the psychopath at last.
As it begins to get dark, Murphy spots a freight train traveling at a moderate speed. He lands ahead of the train, and tries to get out before the train hits. The train, unable to stop in time, smashes the chopper into pieces in a final big explosion. The final shot shows an exhausted Murphy walking away from the remains of Blue Thunder.
Freeze frame. In a final voiceover by Alf Hewitt, he reports that Murphy ran out of fuel and destroyed the prototype helicopter and he begins to talk more about a goverment conspiracy behind the construction of Blue Thunder.