FRANKFURT (Reuters) - German airline Lufthansa is considering taking a stake in Latvia's state-owned carrier airBaltic ahead of its IPO, a source familiar with the matter told Reuters on Tuesday.

Europe's airline industry has gradually consolidated over the past 20 years but remains fragmented, with small national carriers struggling to compete with larger rivals.

Lufthansa is assessing its options but it is in the early stages, the source said.

Bloomberg News first reported on Lufthansa's possible investment.

A spokesperson for Lufthansa said the firm would not comment on rumours. AirBaltic also declined to comment.

AirBaltic CEO Martin Gauss told Reuters in March that he could imagine the firm consolidated as part of a larger group, citing Lufthansa's and IAG's absorptions of airlines Swiss and Iberia.

(Reporting by Ilona Wissenbach and Joanna Plucinska, writing by Louis van Boxel-Woolf, editing by Rachel More)