Frank Murphy (Roy Scheider) is a "Metropolitan Police Department" air support division pilot and troubled Vietnam War veteran with post traumatic stress disorder (PTSD). His newly assigned observer is novice Richard Lymangood (Daniel Stern). The two patrol Los Angeles at night and give assistance to police forces on the ground.

Murphy is instructed to attend a sunrise demonstration in the Mojave Desert at "Pinkville", and is selected to pilot an advanced helicopter, informally called "The Special" and nicknamed "Blue Thunder", during an evaluation exercise. It is a military-style combat aircraft intended for police use in surveillance and against possible large-scale civic disobedience during the then-upcoming 1984 Olympic games. With powerful armament, and other accoutrements such as thermal infrared scanners, unidirectional microphones and cameras, built-in mobile telephone, computer and modem, and a U-MATIC Video Cassette Recorder (VCR), 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 the death of city councilwoman Diana McNeely turns out to be more than just a random murder, Murphy begins his own covert investigation. He discovers that a subversive action group is intending instead to use Blue Thunder in a military role to quell disorder under the project codename T.H.O.R. ("Tactical Helicopter Offensive Response"), and is secretly eliminating political opponents to advance its agenda.

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