Set in 1969, amidst the jungle of Laos, a local communist peasant takes a shot at a high-flying US transport aircraft. Although the plane is hit and begins to trail smoke, it manages to return to base but crashes, resulting in the loss of several crewmen on board. The story then shifts to Los Angeles, where Billy Covington (played by Robert Downey Jr.) is employed as a helicopter traffic pilot for a local radio station. After violating several safety regulations by flying too low, the U.S. Federal Aviation Administration suspends his pilot's license.
However, his piloting skills and boldness catch the attention of a mysterious government agent. This agent informs Billy that he can regain his license if he accepts a position in Laos with a “strictly civilian” company known as Air America. It quickly becomes clear that Air America is essentially a facade for CIA operations in the region. Faced with unemployment and unable to find alternative job prospects, Billy accepts the offer.
Upon his arrival in Laos, he meets the unconventional pilots and aircraft of Air America, including Gene Ryack (played by Mel Gibson), a cynical and eccentric pilot who also dabbles in arms dealing. Gene utilizes official flights to acquire black market weapons for his personal collection, eyeing a significant sale as his "retirement plan" from Air America.
The narrative escalates when Senator Davenport arrives in Laos on what is officially described as a “fact-finding mission” to probe rumors about Air America’s involvement in drug trafficking for local forces. Major Lemond and Rob Diehl, the CIA operatives in charge of Air America, showcase refugee camps, temples, and cities, cunningly concealing the truth about their drug operations.
During an airdrop of livestock in rural villages with his co-pilot Jack Neely (Art LaFleur), Billy's aircraft is shot down. Just as General Soong's Pilatus PC-6 appears at the crash site, his soldiers load bags of opium, leaving Billy and Jack at the mercy of encroaching Communist Pathet Lao forces. Fortunately, Gene and another pilot manage to rescue them; Billy hops onto Gene's helicopter as the rest of the crew escapes via another aircraft.
However, their helicopter is subsequently taken down by enemy troops, leading to their capture by a local tribe. Gene observes that the tribe wields dated and unreliable flintlock weapons. In a twist of fate, he strikes a deal to supply them with superior arms in exchange for their freedom. Once back at Gene’s home, Billy is taken aback to discover Gene has a family. Grappling with disillusionment towards U.S. actions in Laos, Gene urges Billy to abandon his position at Air America. Billy, however, is bent on exacting revenge against General Soong for his betrayal.
The tension escalates as Senator Davenport grows frustrated with Lemond and Diehl, demanding clarity on the heroin smuggling issue. Soon after their return to base, tragedy strikes when the pilots learn of Jack's death, with Lemond and Diehl falsely pinning the blame on him as the mastermind behind the drug trafficking operations. Fueled by anger, Billy acquires grenades from the black market and retaliates by destroying the heroin factory, unknowingly attracting the guards’ attention as he flees.
Meanwhile, Gene discovers a buyer for his weapons stockpile, allowing him to exit the arms trade, quit Air America, and relocate his family. Billy, on the brink of quitting, reluctantly accepts one last flight. Assigned with co-pilot Babo (Tim Thomerson) to deliver flour to a refugee camp, they are diverted to an airstrip for a supposedly routine inspection. However, a search uncovers kilos of heroin concealed within the flour sacks. Suspecting foul play with their fuel gauge tampered, the duo decides to crash-land on the same airstrip where Billy earlier crashed.
As Gene embarks on a mission to fulfill his largest weapons delivery, he senses something amiss with Billy's predicament and swoops in for a rescue. Together, Billy and Gene devise a plan to sell their aircraft, intending to reclaim Gene’s funds. Ultimately, Senator Davenport stays vigilant, threatening to expose Lemond and Diehl’s corrupt operations to Washington, intensifying the stakes in this dangerous game.
